NY futures ended the week slightly higher, as May gained 35 points to close at 78.17 cents.

The market gave mills another chance to fix below 77 cents when it traded to intra-day lows of 76.80 and 76.81 on Monday and Tuesday, but from what we can tell only a few fixations took place before the market started to head north again. In other words, here we are another week later and nothing has materially changed in the market’s setup!

Futures open interest remains stubbornly high at 27.75 million bales, of which 16.0 million are in May and 4.85 million are in July. This persistently high open interest in the two front months is a clue that hardly any fixations are being done.

The latest on-call report, which shows unfixed sales as of last Friday, confirms that mills haven’t made much progress in bringing their exposure down, as there were still 7.9 million bales open on May and July. The total amount of unfixed on-call sales actually increased to 11.85 million bales, up 0.3 million from the week before.

Meanwhile US export sales continued to steamroll ahead, as another 485,000 running bales of Upland and Pima were sold for both marketing years combined. Participation continued to be broad-based with 19 markets buying and 28 destinations receiving shipments of 346,200 running bales. Total commitments for the season have now reached 12.5 million statistical bales, of which 7.7 million bales have so far been exported. Additionally there are 1.5 million statistical bales on the books for August onwards shipment.

Some analysts apparently see the market’s lackluster reaction to this stellar report as a sign of weakness. We disagree! The reason the market wasn’t off to the races today is due to the fact that mills are still sitting on their hands, waiting for that elusive big dip to bail them out of trouble. However, over the next three months these trade shorts, particularly those tied to on-call fixations, will turn into potent buyers of this market, whether they like it or not.

Speculators are already relatively long and therefore can’t or won’t buy a lot more at this point, although we still feel that they could mobilize some more longs on a breakout to new highs. Expecting them to sell out of their longs is not in the cards at the moment since the trend is still their friend and outside markets don’t provide any sell signals either after the Fed rate hike this week.

We therefore believe that trade shorts will become the protagonists between now and the middle of June. Time is not on their side and the longer they procrastinate, the more they are going to paint themselves into a corner!

China’s reserve sales continued at a healthy clip this week and after the first 9 days auction sales are at 250,000 tons or over 1.1 million bales. We ignore some of the negative commentators who feel that the drop in the daily take-up percentage is reason for concern. We are barely two weeks into a five-month auction series and sales are already at around 12.5% of the expected total!

So where do we go from here? The market continues to be in a holding pattern, waiting for the nearly 8 million fixations in May and July to make their move. Mills didn’t want to fix when the market was below 77 cents earlier this week, so why would we expect them to do so at over 78 cents? However, sooner or later they will run out of time and that’s when things will get interesting! From a technical point of view the market is still in a strong one-year uptrend and there are no signs of a spec long shakeout anytime soon.

With the trade increasingly starting to hedge new crop, while having to get out of existing shorts in the front months, the July/Dec inversion has the potential to widen further over the coming months. We feel that the current market set-up is quite dangerous for the many May and July shorts and would therefore advise to get out as soon as possible. Kicking the can down the road is not a viable risk management strategy!

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